Tuesday, March 31, 2009

Wall St vs. Detroit

What is the difference between Wall St. and Detroit? Innovation. Wall St has too much while Detroit has too little. Granted, it is easier to design a new financial instrument than a new car, but Detroit has seen the warnings since 1973. But to be fair to the car industry, government has been very lax. It takes an entire infrastructure to make a switch from carbon-based combustion to an alternative fuel. We have had massive market failure in the energy market, choosing an aggressive global military strategy to try to ensure steady supplies rather than revitalizing a domestic energy sector. In the meantime, oil despots solidified their control over the world's oil supply. Luckily the summer of 2008, when oil prices reach over $147 a barrel provided a wakeup call and Obama realizes playing OPEC's game is destroying America.

Obama is right to put the screws to Detroit, but he has to back it up with significant energy taxes, particularly at the gas pump to provide price incentives to switch to the new energy infrastructure, not to mention pay for all the money going to Detroit. And for all you inflation-fearers, taxes are one way to reduce inflation! Price incentives through a gas tax will keep the consumer attention on more fuel efficient vehicles. Prices of $6-$10 a gallon of gas will certainly do the trick. The problem will be competing against countries like China and India who are starting to produce for a demographic of billions!

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